Defendants Schlesinger, Adson Partners, and Adson Realty Associates appeal from a judgment of the United States District Court for the Eastern District of New York (Sifton, J.) entered on January 27, 1989 that granted plaintiffs', Tucker Anthony Realty Corporation, et al., motion for a preliminary injunction. Affirmed.
Kearse, Cardamone, and Pierce, Circuit Judges.
Plaintiffs, individuals and corporations, participate as limited partners in two limited partnerships: defendant Adson Realty Associates (Associates) and defendant Adson Partners (Adson). Defendant Richard Schlesinger is the sole general partner of Adson. Believing the general partner was too enterprising a steward, plaintiffs obtained a preliminary injunction on January 27, 1989 in the United States District Court for the Eastern District of New York (Sifton, J.). The preliminary injunction enjoined defendants "from making payments, directly or indirectly, to or for the benefit of defendant Schlesinger [the general partner] and entities in which [he] has an interest, without leave of the Court."
This appeal presents three principal issues: (1) whether the district court applied the correct fiduciary standard to Schlesinger's conduct as a general partner in two limited partnerships; (2) whether there is sufficient evidence that the plaintiff limited partners consented to the self-interested transactions by the general partner to make it unlikely their claim will succeed on the merits; and (3) whether the plaintiffs established irreparable harm requisite to the issuance of a preliminary injunction in their favor.
A brief recitation of the background facts is necessary. Associates was formed in March 1980 to finance the purchase and conversion into cooperatives of a garden apartment complex in Hartsdale, New York. Under the financing agreements, Associates acquired an option to purchase the complex from the actual purchaser, Dalewood Associates. Prior to the conversion of the complex, Associates transferred the option to Adson in exchange for a $5 million promissory note. Today, Associates is largely dormant and the note is its sole asset.
Adson exercised the option, took title to the complex, and conveyed it to the Cooperative Corporation at the completion of the conversion in November 1984. Adson retained ownership of approximately 275 unsold apartments, having a book value of ten and a half million dollars.
Defendant Schlesinger, as the general partner of Adson, had the duty of renovating, maintaining, selling, and collecting rent on the units. In carrying out his duties, he engaged in extensive self-dealing, hiring companies he owned or controlled to manage, renovate, and sell the apartments. He also lent money to Adson with interest fixed several points above the prime rate. Presumably this money has been used to pay off Schlesinger-owned companies for the actual work they performed resulting in a double profit to him: first, on the work performed by his alter-ego companies, and second, on the above-prime-rate loans. In addition, Schlesinger has used in excess of $50,000 of Adson's funds to defend himself in this action.
Plaintiffs allege that the general partner breached his fiduciary duty of loyalty to the limited partners and the partnership by engaging in such self-dealing. Schlesinger admits engaging in the self-interested transactions, but claims that this did not constitute a breach of his fiduciary duty to the limited partners because the companies he employed were hired in good faith and on commercially reasonable terms.
Adson's financial situation is precarious. Although the book value of the complex is several million dollars, the remaining units cannot be sold and turned into cash until they are vacated by existing tenants. There has been little turnover in occupancy with a consequent low rate of vacancies. Further, Adson owes Chemical Bank $1,370,000 on a loan due on May 30, 1993 that contains an acceleration of principal clause activated upon, among other events, the declaration that Adson is insolvent. Adson also owes Mark David Associates, a general partnership in which Schlesinger and William Weinstein each own a one-half interest, $500,000 due on demand. It is further obligated to Schlesinger and Weinstein individually on a demand loan for $375,000. They loaned Adson this money out of a $500,000 loan they received from Citytrust. Their obligation to Citytrust is also due on demand. Thus, Adson is effectively insolvent with current liabilities $42,000 greater than current assets, excluding all the monies due and owed to Schlesinger and to Chemical Bank that are technically not current liabilities.
Plaintiffs sought damages, injunctive relief and judicial dissolution of the two Adson partnerships, and moved for a preliminary injunction and for the appointment of a receiver. In an opinion and order dated January 27, 1989 Judge Sifton issued the preliminary injunction. Plaintiffs' showing of the partnerships' danger of bankruptcy -- caused, at least in part, by Schlesinger's self-dealing -- had adequately demonstrated to the district court the required irreparable harm. The district judge also determined that plaintiffs would probably succeed on the merits of their claim that Schlesinger breached his fiduciary duty to the limited partners. Specifically, the district court held that a general partner of a limited partnership owes a duty of loyalty akin to a trustee's duty to beneficiaries, and believed that duty was higher than the duty owed by a corporate director to shareholders. Based upon this standard, it held that a general partner is prohibited from self-dealing, including doing business with companies he controls or owns, unless the partnership agreement permits it or the limited partners otherwise ratify the transactions. Because Schlesinger sought only to prove the self-interested transactions were fairly taken in good faith, and proved neither an agreement nor authorization, the plaintiffs were granted preliminary injunctive relief.
Although we do not adopt the duty of loyalty standard relied upon by the district court, we find that the district court's issuance of a preliminary injunction under the proper standard would not ...